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The Service Secret

If you could cut the cost of your city’s services by 25 percent without hurting service quality, would you do it?

The city of Indianapolis has done it with dozens of services — everything from managing its airports to treating its waste water. Savings will exceed $200 million over a seven year period.

What’s the secret? Indianapolis requires many city agencies to compete with private companies for the right to deliver services.

Phoenix pioneered public-private competition almost 20 years ago, when it began letting private companies bid for the right to pick up its garbage. The strategy cut the cost of pickup so fast that Phoenix applied it to several other services in the Department of Public Works as well.

But Indianapolis Mayor Steve Goldsmith has used it citywide. Though he campaigned in 1991 on a theme of privatization, he quickly realized that private ownership was not the key to success: Competition was.

That view was confirmed when Goldsmith decided to contract out the task of sending out sewer bills. When he asked the private water utility how much it could do the job for — since it already sent monthly bills to the same people — it bid 5 percent less than it was already costing the city. Unimpressed, Goldsmith turned to other private bidders. Faced with competition, the water company bid 70 percent below the city’s cost.

Since 1992, Goldsmith has required competitive bidding for garbage collection, microfilm services, street repairs and several dozen other services — some of them more than once. City agencies have not always chosen to bid, but when they have, savings have averaged 25 percent. Of the first 64 bids, public employees won 16 and split 13 others with private contractors.

The biggest and most controversial city competition was for management of the waste water treatment system. The local union, the American Federation of State, County and Municipal Employees (AFSCME), objected bitterly. Plant managers complained that such a radical move was not only unnecessary but risky, because the plants were already award winners. Even Goldsmith’s own consultants, Ernst & Young, projected that competitive bidding would save only 5 percent.

But Goldsmith was by now a true believer in the power of competition. And he was not disappointed. The winner, a partnership between the company that provided Indianapolis’s drinking water and a huge French waste water treatment firm, offered a 29.5 percent reduction in costs — a savings of $65 million over five years.

In the company’s first three years, it has performed better than its public predecessor. Its employees have done better also. “The majority [of former city workers] would say they don’t want to come back,” says local AFSCME President Steve Fantauzzo.

Part of the reason competition has worked in Indianapolis is that Fantauzzo and Goldsmith have negotiated a method that is fair to union members, who make up 20 percent of the workforce. Goldsmith required the waste water contractor to recognize AFSCME as the bargaining unit for city employees it hired, and he adopted an unwritten no-layoff policy for union members. When union members lose their jobs through competition, they are either hired by the private contractor, placed in another city job or retrained and placed in a private sector job.

By the end of 1995, the mayor had eliminated more than 1,025 of the 4,416 city jobs that existed when he took office. He exempted the police and fire departments from competitive bidding, but the rest of the city work force had shrunk by more than 40 percent. Deputy Mayor Skip Stitt says that about 20 percent of the 1,025 were laid off (none of them union members). The rest went to work for private contractors, were moved into other city jobs, were placed in private sector jobs or took early-retirement packages.

Once they had to compete, workers began negotiating for a share of the savings they produced. Typically, they now collect 10 to 25 percent of savings when they drive their costs below their bid price. The first year the trash collectors negotiated such a “gainsharing” payment, they each took home an extra $1,750.

Some units are beginning to compete for contracts let by other, nearby governments. And the combination of competition, a no-layoff policy for union members and gainsharing has turned union behavior upside down. Union members now suggest outsourcing when it will save money.
“The outsourcing issue used to be a big fight with the administration,” says Stitt. “But now it’s not.”

Fantauzzo agrees. “Those employees and their managers are determining what they do best, their core activities.” In fleet services, for example, “we don’t do body work best, so let’s get out of the body work business.”

“Look what happens in the 11th month of a budget in traditional government,” he adds. “Everyone is looking to spend the last dime to justify that plus more next year. Here, people are looking to save every dime because they figure a piece of the pie is going into their pocket.”